In the previous installment, I asked you to imagine that libertarians have come to power in the tiny, hitherto-statist country of East Zimiamvia. My question, then as now, is: What can the new libertarian régime do to transform East Zimiamvia into a free nation without departing from libertarian principles in the process?

According to one point of view (which I've been calling the Principled Objection), nothing. One version of this objection maintains that the mere holding of political power, even by those with the purest libertarian intentions, constitutes aggression and so is impermissible. That's the position I attempted to refute last issue.

But there's a more sophisticated version of the Principled Objection, one that goes like this: Any successful dismantling of the state must be gradual (where any process lasting longer than immediate overnight abolition counts as gradual). If the East Zimiamvian state is eradicated overnight, before market-based alternatives have had time to develop, the result will be chaos, and a populace as yet unused to freedom will most likely respond to this chaos by repudiating the libertarians and at once building a new state, perhaps worse than the old one. Hence a libertarian government, in order to succeed in its goals, must adopt a policy of gradualism. But this is precisely what it cannot do, if it is to remain consistent with libertarian principles. A government that is merely phasing out taxes and regulations is a government that is continuing to tax and regulate. If libertarian officials enforce the laws they have not yet repealed (and not enforcing them would count as repealing them de facto), they are engaging in aggression, contrary to their moral duty, and so have become simply a new brand of thieves and thugs, however well-intentioned. Hence, the argument concludes, there is nothing a libertarian government can do that is both practicable and permissible.

The government does primarily three things: it taxes, it regulates, and it provides services. (Among services I include not only things like courts, highways, and mail delivery, but also subsidies to the rich and welfare payments to the poor.)

Of these three, the one whose abrupt termination would cause the greatest amount of social dislocation is services. Note, however, that the provision of government services is not in itself a form of aggression. The aggressive aspect lies in the fact that the services are funded by stolen money (taxation), and that competitors are often prohibited or severely restricted (regulation). Hence a gradual phase-out of government services (as opposed to immediate abolition) involves no violation of libertarian principle, provided some solution can be found to the problems of taxation and regulation. (How these services are to be funded is a question I shall take up shortly.)

Let's turn to regulation, then. Most of the harmful effects of deregulation are caused by incomplete deregulation — in particular, by deregulating X while neglecting to deprive X of special governmental privileges that consist of regulations or taxes on everybody else. Three examples leap to mind: First, there are cases in which governments, invoking "free market" values, have "deregulated" (i.e., permitted a broader range of pricing and other options to) industries that are either monopolies (e.g., power companies with a legal guarantee from competition) or near-monopolies (e.g., industries dominated by powerful corporations who are insulated from competition through regulations and tax codes that make it more difficult for newcomers to enter the market).

Second, there is the notorious S & L scandal, when the Reagan Administration gave Savings and Loans greater freedom to make decisions with depositors' money, while at the same time retaining federal deposit insurance and so ensuring that the taxpayers, rather than the lenders, would bear the costs of the lenders' mistakes.

Third — in an example that shows that big government is no friend to the environment — politicians have given loggers greater freedom to log on federal lands, at a fraction of the cost that a private landholder would demand. In all these examples, partial deregulation amounts in fact to a fascist grant of quasi-governmental privilege, without accountability, to private entities — a practice that can only lead to skewed incentives and abuse of power. (Governments are socialist to the extent that they seek to exercise direct control over the economy, and fascist to the extent that they delegate this task to the powerful "private" beneficiaries of state privileges and protection. Socialism means rule by bureaucrats; fascism means rule by plutocrats. The current American system seems to be a mixture of the two.) Those who complain of the harmful effects of deregulation are quite correct, if they are referring to what passes for "deregulation" under a statist régime. (The statists have similarly appropriated the term "privatization" to refer to the fascist process of "contracting out," i.e., of granting to private companies an exclusive monopoly to perform services usually monopolized by government directly — as opposed to the original libertarian meaning of "privatization," which was that such services were to be turned over to the competitive market free and clear.)

The dislocative effects of genuine and complete deregulation would be far smaller. That is not to say that they would be nonexistent, of course — e.g., one would expect to see a fair number of layoffs as hitherto-protected industries are suddenly exposed to competition; abolition of minimum-wage laws, while it would help to alleviate unemployment, would also mean that initially many families would have a harder time making ends meet; and so on.

But two things should be said here. First, government regulations have the same effect on economic growth as molasses does when poured into a clockwork mechanism. The more regulatory hurdles one must leap in order to start up a new enterprise or expand an old one, the fewer such enterprises will be started up or expanded. As a result, the whole economy slows down. Abolishing all regulations would increase productivity enormously, and this can only benefit the initial victims of dislocation — the poor and unemployed. A rising tide does lift all boats — except when some of the boats are anchored to the bottom by short chains. Unfortunately, governments specialize in the short-chain business. This is another pernicious result of government regulations (including everything from licensing laws to state control of the money supply): while such regulations harm the economy in general, they have a disproportionately negative impact on the least affluent members of society. (For a defense of this claim, and an argument that "a free society would see the virtual elimination of poverty," see my "Who's the Scrooge? Libertarians and Compassion," in Formulations, Vol. I, No. 2 (Winter 1993-94).) The more quickly the economy is deregulated, the sooner the poor will benefit from the explosion of wealth that genuine deregulation would bring. Swifter deregulation might make social dislocation more acute, but it would also make it much shorter.

Those who seek to dismantle Leviathan can derive both instruction and inspiration from the model of the Czech Republic (the only nation-state I know of whose leader is a member of ISIL!):

"There are, at bottom, just two ways to bring economic rationality to a state which has seen none of it. One is to carefully analyze the situation, to call high-level conferences and consult with international experts, to measure each tentative step, to be cautious of doing the wrong thing — of going too far, of giving away too much. The other path is to decide that speed is the very essence of reform and that the great catastrophe lies not in doing the wrong thing but in doing nothing.

Most of Eastern Europe has chosen the cautious route. Alone among the former satellites of the Soviet Union, the Czech Republic has elected to go fast. Now as Hungary, Poland, and Russia struggle to emerge from the abyss of the planned economy, as Romania and Bulgaria and Ukraine bobble in a post-socialist/pre-capitalist never-never land, a thriving marketplace is flashing its sparkle in the Czech Republic, a modern experiment in radical capitalist transformation. ...

The Czech model was not how the Western experts had charted the East European reform era. ... surely the task of privatizing the Czech Republic's 2,700 state-owned firms could not be done overnight. ... By March 1995, however, the assets of the Czech Republic ... were 80 percent owned by private persons or corporations .... Czech living standards are increasing rapidly. Inflation ... is now under 8 percent a year; indeed, the currency has held its ground against the U.S. dollar since 1991. Exports are booming and the federal budget is in surplus. Unemployment is at 3.5 percent .... The expanding service center is swallowing up thousands of 'workers' from the 'industrial' sector ...."

(Thomas W. Hazlett, "The Czech Miracle: Why Privatization Went Right in the Czech Republic," Reason, April 1995, pp. 28-29.)

Of course, when Hazlett speaks of "overnight" privatization, he is being metaphorical; the Czech Republic's journey toward a market economy has taken years, not hours, and it is far from complete. Still, the Czech experience gives us reasons for optimism. Hence I see no particularly strong case, even on pragmatic grounds, for a gradualist (as opposed to an abolitionist) approach to deregulation — so long as some non-coercive means can be found of supplying the services, welfare payments, etc., that will enable the citizens to survive the transitional period without excessive hardship. (I will deal with the funding issue shortly.)

Second, there are in any case some cases of dislocation caused by rapid deregulation where a gradualist approach might even be ethically justified. Suppose Amalgamated Widgets holds a grant of monopoly privilege in the field of widget production, and also is subject to strict price controls (specifically, a price cap). There are conceivably three ways deregulation might proceed.

Option One: Remove the price controls now, and the monopoly privilege later. There are both rights-based and pragmatic objections to this approach. On rights-based grounds, the grant of a monopoly privilege constitutes governmental aggression for as long as it lasts, and justice demands that it be terminated immediately. Pragmatically, if the price controls are lifted while Amalgamated Widgets remains a monopoly, then Amalgamated Widgets will be able to charge arbitrarily high prices for widgets, and customers who need widgets will be at its mercy. Hence Option One is a non-starter.

Option Two: Remove the price controls and the monopoly privilege at the same time. This option is clearly preferable to Option One, but it is not without its problems. If Amalgamated Widgets' monopoly privilege is abolished overnight, it may take some time for competitors to gear up to produce and distribute rival widgets, and in the meantime Amalgamated Widgets can still cause economic hardship by charging monopoly prices, exploiting to the fullest its last fading shreds of state privilege.

Option Three: Remove the monopoly privilege now, and the price controls later. This is arguably the most attractive solution from a pragmatic perspective, as it would ease the transition process. (The price controls in question are only on Amalgamated Widgets, not on its competitors.) Too low a price ceiling would probably not be a good idea — we want to encourage private organizations to form in competition with Amalgamated Widgets, after all — but a temporary price cap of some kind would prevent undue hardship during the period before competitors have arisen.

But is it ethical to continue imposing price controls on what is now a private company, one competitor among others? Perhaps it is. Consider the fact that Amalgamated Widgets' privileged position in the marketplace is the result neither of it own efforts nor of mere chance; rather, it is the result of systematic aggression by government in its favor. It might be argued, then, that a temporary cap on the company's prices could be justified in order to prevent it from taking undue advantage of a position it gained through unjust violence against the innocent.

(One has to be careful here, however. Sometimes the beneficiaries of governmental privilege are *also* the victims of governmental aggression, and it can be very difficult to figure out who are the net winners and who the net losers. For example, cable TV services in Chapel Hill are supplied by Cablevision, a company under contract to the city government. Cablevision thus enjoys a coercive monopoly on cable TV in Chapel Hill, and local complaints about its high fees and slipshod service suggest that it abuses its power. On the other hand, Cablevision's contract comes up for periodic renewal, and the company can never be quite sure whether the city government will in fact renew it. If the city decides instead to award the contract to a competitor, Cablevision loses all its Chapel Hill business in one fell swoop. In a competitive industry, a company can notice a slow drain of its customers to a competitor, and can accordingly take steps to improve its own service; but Cablevision, insulated from market forces, has no way of determining the preference strengths behind the various customer complaints it receives. Moreover, the uncertainty over upcoming contract renewal decisions makes it extremely risky for Cablevision to engage in long-term planning or investment. So is Cablevision exploiting Chapel Hill, or is Chapel Hill exploiting Cablevision?)

I've argued, then, that a gradualist approach to deregulation may be both practical and permissible in some areas; where this is not the case, immediate deregulation is quite in order, so long as government services are maintained to ease the transition. I would further argue that a gradualist as opposed to an abolitionist approach to government services is superior not only on pragmatic but also on rights-based grounds. In most cases, those who are in need of government help are in such need primarily neither through chance nor through their own fault, but rather because of government policies that keep people needy, and also throw impediments in the way of private-sector satisfaction of those needs. It only seems fair that the government should be forced to undo the damage it has wrought. I recall an apposite comment several years ago in a libertarian newsletter published in New York state (I forget the author's name, and the precise wording): "Government has pushed people out onto tightrope wires; and all libertarians can think to do is to call for the abolition of safety nets?"

But if government services are to be phased out gradually rather than abolished overnight, how are such services to be funded in the meantime? This brings us to the third activity of government: taxation. On pragmatic grounds, it seems as though the most successful course would be to phase taxes out gradually; while tax revenues lasted, they would be used to fund the gradual phase-out of services, thus giving the market a chance to catch up. But on rights-based grounds, taxation is aggression, and those who tax are morally required to cease and desist immediately.

What, then, are the morally permissible revenue options for a libertarian-minded government? It seems to me that there are six. As we consider them, keep in mind that most of what government does has no redeeming aspects and could be cut at once, so the funding needs of our new East Zimiamvian régime should be fairly modest.

Option A: Raise money by selling off government assets. This is fairly obvious. There are some problems with it, though. The privatization scheme that seems both the fairest and the most effective is the Czech Republic's voucher system:

"[One of the] key elements to the Czech economic reforms [was] 'mass privatization.' ... Adult citizens would bid for companies with voucher coupons, with each entitled to buy one booklet of 1,000 'points' for a nominal sum. The idea was appealing because simply transferring assets to private citizens is equitable and democratic. It also had a very practical aspect to recommend it: Assets could be privatized with minimal payment. That's a fairly important feature when you are dealing with 15 million near-penniless survivors of communism. So on philosophical grounds — 'you deserve a break today' — as well as pragmatic ones — 'no cash? no problem!' — turning over state enterprises to the citizens, one man, one share, seemed the right thing to do. ...

Privatization projects included various means for transferring state assets to private owners: direct sales, tender offers, restitution, auctions, and voucher coupons. All told, about half of the book value of large-scale privatization was distributed via vouchers — $10 billion. ... Czechoslovakian citizens over the age of 18 were invited to purchase their 1,000-point booklet to use in the voucher privatization auction. These coupons were officially registered for 1,000 Czech Crowns ($35, about one week's wages) at over 650 outlets across the country. ...

[Initially] Western consultants and bankers pooh-poohed the idea in great spasms of laughter. ... Yet some 8.54 million citizens — 71 percent of eligible purchasers — bought and registered voucher coupons. Enthusiasm was spurred by the spontaneous emergence of investment privatization funds (IPFs), some of which guaranteed 20,000 Crowns for those willing to turn over their 1,000-Crown investments. ... Some 72 percent of all the coupon points were entrusted to such funds .... The mere existence of private assets spontaneously created — as if by an 'invisible hand' — the means needed to manage capital shares.

Western experts had warned that giving away stock shares to citizens was doomed to failure because [when] stock ownership is so widely distributed ... no one party has an incentive to monitor the value of firms or the performance of managers .... Yet the Czechs again relied on a bottoms-up strategy: Simply hand off equity ownership to individuals and allow markets to find a solution."

("The Czech Miracle," pp. 31-34.)

This, I think, is clearly the example that a budding free nation should follow. But it's not a method calculated to swell the coffers of the East Zimiamvian state treasury.

On the other hand, the Czech model does reduce some of the need for government revenues, by providing a route for getting cash quickly into the hands of citizens. The IPFs described by Hazlett might be characterized as a private-sector welfare program formed in response to the incentives created by the privatization voucher scheme.

Option B: Charge user fees for government services. So long as the government permits competition, there is nothing particularly un-libertarian about the government's offering various services and charging for them. If the market has not yet produced competitors offering such services, there will be plenty of demands for the government's services, and revenue will come in. (The government will need to impose some price controls on itself, however, for the same reason as in the Amalgamated Widgets case.) And once enough competitors have arisen to cut significantly into the government's revenue, the government's services are no longer needed anyway.

One service in particular that the government will need to offer is passports. A free nation will naturally have open borders with no passports needed for entry or exit; but other nations will not. Natives of East Zimiamvia may be unable to travel abroad if they cannot obtain an East Zimiamvian passport. Likewise, foreigners who seek to escape excessive taxation in their home countries by renouncing their native citizenship in favor of East Zimiamvian citizenship will no longer be able to use their old passports and will need new ones. The East Zimiamvian government may permit competition in passport production, as it permits competition in everything, but the odds are that foreign countries will choose to recognize only those passports issued by the official East Zimiamvian government, and so it is only the official government passports that citizens will be willing to purchase — for a price.

Option C: Solicit voluntary contributions. The government needs money? Hold a telethon! If it works for Jerry's Kids, it might work for us too. And the international free nation movement might be able to contribute as well (depending on how well-funded it is).

Option D: Use non-coercive measures to get people to pay their taxes. This is something like Option C, but with a bit of a twist. Continue to assess taxes as before — even call them "taxes" — but don't enforce them. That way, such "taxes" don't run afoul of libertarian scruples. Would people still pay taxes if they knew nothing would happen to tax "cheats"? Most probably wouldn't; but some would, whether from a sense of civic duty or as a result of conformist social pressure. (A helping hand could even be given to this latter influence by publishing the names of those who paid their taxes and those who didn't. Sure, it's tacky, but it's better than coercion!)

Option E: Tax the beneficiaries of state privilege. Call this one: How to soak the rich with a clear libertarian conscience. It can be argued that it is permissible to impose coercive taxes, temporarily at least, on some people and some businesses — namely, those whose wealth is to a great extent the product of state protection and subsidy. Isn't it simply an act of just restitution to take back some of these ill-gotten gains and return them to the people in the form of government services or even direct payments?

Option F: Restrict the franchise to taxpayers. Is the franchise a right or a privilege? It depends. When the government holds a monopoly on legal services (legislation, adjudication, and enforcement), then it seems to me that its customers are justified in demanding the right to exercise some control, in the name of self-defense against this monopoly, over its decision processes, by means of the franchise or some analogous mechanism. (Here, accordingly, I disagree with those libertarians who say that an absolute monarchy would be a just form of government if the monarch were a libertarian, and that pragmatic considerations alone count against such a system.) But that to which one has a right, one need not pay for. So where government holds a monopoly on legal services, it has no right to charge its customers for the right to vote.

But of course the government also has no right to hold a monopoly on legal services in the first place. And once it relinquishes that monopoly (in which case it is strictly speaking no longer a government — but it may very well find it politic to continue calling itself a government), it is simply a service provider like any other, and its customers no longer have any grounds for demanding to participate in its decisions. At this point the franchise becomes a privilege, not a right, and the "government" becomes justified in charging for it.

This is the approach taken in my Virtual-Canton Constitution, which is structured as a genuine "social contract":

'The Citizens of the Free Nation shall be any persons who, being competent, shall have signed and assented to this Constitution. Citizenship carries with it the right to vote and eligibility for public office, which are denied to non-Citizens; it carries with it also the liability to taxation by the Federal Administration and by the Citizen's Virtual Canton, from which liability non-Citizens are exempt. Thus the Government of the Free Nation is a voluntary cooperative association, with free exit and entry, and taxation is thus likewise voluntary, being conditional on Citizenship. Citizens may renounce their Citizenship at any time, and reclaim it later as they choose."

The rationale for this provision is elaborated in my commentary:"This form of 'taxation' is consistent with libertarian scruples, amounting to no more than a fee to which one is liable only so long as one remains a member of the group.

Given that Citizenship brings taxation in its wake, why would any resident choose to become a Citizen? Well, as the foreign policy interface (and holder of the lease, if any) among other things, the Federal Administration has the potential for significant impact, positive or negative, on the lives of the Free Nation's residents. Those residents will have an incentive to influence the Federal Administration's policies through voting or seeking public office, and so will be willing to become Citizens. Thus the Free Nation is assured a source of revenue.

There is also another reason for expecting many of East Zimiamvia's indigenous residents to sign up as Citizens and so undertake a contractual obligation to pay taxes, at least initially. Under a libertarian constitution, the government will be so tightly restricted that its importance — and consequently the importance of the vote — will be minimal. But the inhabitants of our fledgling libertarian nation, being accustomed to a statist régime where the state, and consequently the vote, are all-important, will initially be unwilling to surrender the franchise; and since the taxes charged by this government will presumably be much lower than what the residents are used to paying, they will initially be unlikely to see the cost of the franchise as excessive. As the libertarian régime progresses, and the East Zimiamvian natives discover that all the important action is in the private sector, revenues may well drop to a point at which the government is forced into bankruptcy; but if that happens, it will be a sign that the government is no longer needed anyway. I am concerned primarily with the acquisition of revenue during the transitional period.

On this whole question of voluntary taxation and constitutional reform, the advice of Machiavelli may be relevant:

"He who desires or proposes to change the form of government in a state and wishes it to be acceptable and to be able to maintain it to everyone's satisfaction, must needs retain at least the shadow of its ancient customs, so that institutions may not appear to its people to have been changed, though in point of fact the new institutions may be radically different from the old ones. This he must do because men in general are as much affected by what a thing appears to be as by what it is, indeed they are frequently influenced more by appearances than by the reality.

For this reason the Romans, on acquiring freedom, recognized the need of this from the start; and when in place of a king they appointed two consuls [the chief executive officers of the Roman state], they decided that the latter should not have more than twelve lictors [the consuls' attendants], so as not to exceed the number which had ministered to the kings.

Furthermore, since when a commemorative sacrifice was offered it could only be offered by the king in person, and they did not wish the absence of the kings to arouse in the people a desire for anything pertaining to the past, they appointed a 'master of ceremonies' whom they called the 'sacrificial king' and put him under the high priest. It thus came about that the populace were content with this sacrifice, and had no occasion, for lack of a king, to desire that he should return.

This should be noted by all who contemplate abolishing an ancient form of constitution in a city and setting up a new and free form; because, since novelties cause men to change their minds, you should see to it that changes retain as much as possible of what is old, and that, if changes are made in the number, the authority and the period of office of the magistrates, they should retain the traditional names."

This is good advice to free nation founders in general, and should guide them in everything from the naming of offices and the choice of flag to the design of constitutional structure. And it is one reason that it may well be advisable to retain terms like "government," "taxes," and "franchise," at least initially, even though strictly speaking a security agency that permits competition is no government, revenues that are collected by non-coercive means are no taxes, and a voting process unconnected with a state is no franchise. Retaining statist terminology during the transitional phase may offer a sense of comforting familiarity, and help to prevent the East Zimiamvian population from feeling that it is being plunged into anarchy. In addition, the retention of statist terminology may serve to bring in more revenue. People may feel: "This is my government, of course I want citizenship and the right to vote, and taxes are only to be expected." Much less probable is the sentiment: "This is temporarily the largest security agency, of course I want to be its customer, participate in its deliberative process, and pay its fees."

Here, then, is my neo-Machiavellian suggestion for obtaining Option F revenues as soon as possible, even before the transition process is completed:

1. Have a new libertarian constitution ready to put into effect the minute you take power. Your new government's transitional powers can be built into the constitution with sunset clauses, while the more anarchic elements in the constitution are postponed, i.e., written in but specified as coming into force at a later date. (The U.S. Constitution has two "postponements," one in Article I, Section 9, and the other in Article V.)

2. Be sure to include somewhere in that constitution a provision — not one of the "postponed" ones — forbidding all coercive monopolies, including monopolies on legal services. (See sections 2.2.11-13 of my Virtual-Canton Constitution for an example.) Casuistically speaking, this step is a precondition for the moral legitimacy of the rest of the plan.

3. Make sure the constitution also includes language (again, not in the "postponed" section) equivalent to my "social contract" provision (see 1.1.3 above) restricting taxation and the franchise to citizens, and citizenship to signatories of the constitution.

4. Announce early elections, to some offices at least (perhaps those least able to interfere with the transitional government's program).

5. Hold a voter registration drive, announcing that only those registered since the adoption of the new constitution will be eligible to vote in the upcoming election.

6. Make sure the voter registration process includes an Affirmation of Citizenship, involving a signed agreement to the constitution. This can be presented as simply a more formal version of the "oath to uphold the Constitution" traditionally required when registering to vote. If the Affirmation can incorporate language similar to such an oath administered under the preceding régime, so much the better.

7. Tax the folks who sign!

This approach seems the one likeliest to bring in the greatest number of voluntary taxpayers, by exploiting their allegiance to traditional forms without actually deceiving them in any way (any more than the ancient Romans were deceived into thinking the "sacrificial king" was a genuine king with traditional monarchical authority). D

Roderick T. Long is Assistant Professor of Philosophy at the University of North Carolina at Chapel Hill. A frequent lecturer on libertarian topics, he is currently completing a book tentatively titled Aristotle on Fate and Freedom.